道富銀行 (STT) 2009 Q3 法說會逐字稿

Good morning, and welcome to State Street Corporation's third-quarter call and webcast.

Today's discussion is being broadcast live on State Street's website at www.StateStreet.com/stockholder.

This call is also being recorded for replay.

State Street's call is copyrighted; all rights are reserved.

The call may not be recorded for rebroadcast or distribution in whole or in part without express written authorization from State Street and the only authorized broadcast of this call is housed on State Street's website.

At the end of today's presentation we'll conduct a question-and-answer session.

(Operator Instructions).

Now I'd like to introduce Kelley MacDonald, Senior Vice President for Investor Relations at State Street.

Please go ahead.

Before Ron Logue, our Chairman and CEO, and CFO Ed Resch begin their remarks, I'd like to remind you that during this call we will be making forward-looking statements.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in State Street's 2008 annual report on Form 10-K and its subsequent filings with the SEC including its current report on Form 8-K dated May 18, 2009.

We encourage you to review those filings including the sections on risk factors concerning any forward-looking statements we make today.

Any such forward looking statements speak only as of today, October 20, 2009, and the Corporation does not undertake to revise such forward-looking statements to reflect events or changes after today.

I'd also like to remind you that you can find a slide presentation regarding the Corporation's investment portfolio, as well as our third-quarter earnings press release, which includes reconciliations of non-GAAP measures referred to on this webcast, in the investor relations portion of our website as referenced in our press release this morning.

Ron?

Thank you, Kelley.

Good morning, everyone.

We continue to navigate successfully through these slowly improving times, seeking to build our base revenue represented by servicing fee and management fee revenue, while at the same time focusing heavily on expense control.

The solid improvement in servicing and management fees being generated here is being somewhat obscured by the compressed spreads affecting both securities finance and net interest revenue and the lessened volatility being experienced in trading services, all of which is being compared to the outsized results in 2008.

Now as I stressed last quarter, what I'm looking for is sustainable progress over time, growth in total revenue against continued expense control.

Let's talk about revenue growth first.

As markets improved and as we added new business our third-quarter servicing and management revenue increased compared to the second quarter.

In the third quarter we added $168 billion in assets to be serviced and we added $65 billion in net assets at State Street Global Advisors, particularly into passive and ETF strategies.

As the customers of hedge fund managers require an independent third party administrator, we have seen solid growth in those assets.

We added 29 customers year to date in the business for which we will provide hedge fund servicing.

This quarter, as of September 30, 2009, our assets have grown 5% or from $263 billion as of June 30, 2009 to $276 billion.

In addition, our private equity servicing business has added five new clients during the third quarter.

And as of September 30, 2009, there's $145 billion in assets under administration, up from $136 billion as of June 30, 2009.

Some of our investment servicing wins in the third quarter included -- building on an existing relationship, Calamos Investments, appointed us to provide custody, fund administration and securities lending services to its several collective fund structures including open and closed end mutual funds, Dublin [use its] and private funds worth approximately $24 billion in assets.

Morgan Stanley Advisor Funds appointed State Street to provide fund administration including financial reporting and securities lending compliance for $36 billion held in its 89 mutual funds.

ING Bank of Canada recently chose State Street to provide custody and valuations for their corporate treasury assets of CAD6.9 billion as well as additional assets from ING Direct Asset Management.

Australian fund manager, QIC, appointed us to provide a full range of investment services for their new Irish domiciled qualified investment fund.

State Street will provide custody fund administration and performance and analytics services for the fund.

State Street Global Advisors also added significant new clients during the quarter, including Neuberger Berman Group, which selected SSgA to provide taxable money market funds, Neuberger Berman Fund shareholders and clients.

AP-Fonden 1 Stockholm selected SSgA to manage $140 million in passive alternative investments.

The London Borough of Harrow has named State Street Global Advisors to manage $163 million in UK passive equity mandates.

Also this quarter we added five new customers in our securities finance business and the participation in the program has stabilized.

Despite these positive wins our revenue from our securities finance business declined from the second quarter primarily due to significant compression in spreads.

The level of revenue from trading services last year was primarily driven by significant volatility in the highly disrupted markets.

Normalizing markets coupled with some seasonal slowness in the third quarter of this year negatively impacted trading revenue in the third quarter.

Net interest income increased 23% from the second quarter due primarily to discount accretion attributable to the consolidation of the conduits in the second quarter.

Our net interest margin, excluding discount accretion, is lower but has stabilized helped by a reinvestment program which we began this quarter.

In early July we began investing in highly rated securities, mostly AAA rated agency mortgage-backed securities, and Ed will provide more detail shortly.

Spreads on fixed income securities have compressed significantly, improving State Street's mark to market valuations in our investment portfolio.

As liquidity returned to the market the unrealized losses are more than cut in half from this December level, from $6.32 billion to $2.98 billion.

As we have consistently stated, we believe the vast majority of our assets will mature at par.

It's also become increasingly important to us as we operate in a lower growth environment to extend our core competency in expense control, which I think we've been demonstrating during this difficult period.

Again this quarter we achieved positive operating leverage compared to last year's third quarter.

The investments we made during past high revenue growth periods are paying off in efficiencies without the sacrifice of quality.

You will notice that other than the sequential quarter increase in salaries and benefits due to accruing performance-based incentive compensation beginning this quarter compared to the second quarter all other expense lines remained flat.

Growth in the second half of 2009, particularly in securities finance and trading revenue, does not appear to be quite as strong as we originally forecast on May 18, 2009 and confirmed on July 21.

As a result, we're updating our outlook for operating revenue in 2009.

We now expect operating revenue to decline about 16% from the record level of 2008 and our operating earnings per share for the year to be between $4.13 and $4.17.

We expect operating return on equity to be within our long-term outlook of 14% to 17%.

I also remind you that we are using approximately 475 million shares as the average shares available to support the calculation of fully diluted earnings per share on an annual basis, compared with 416 million shares on average in 2008.

We're still working on our budget for 2010 and will provide our outlook for 2010 at our meeting of investors and analysts next year.

Now I'll turn the call over to Ed.

Thank you, Ron; good morning, everybody.

This morning I'll review three areas -- first, the results of the third quarter; second, the improvement in the unrealized losses as well as the overall performance of our investment portfolio; and finally, a review of our capital ratios and the execution of our tangible common equity improvement plan.

First, the results of the third quarter.

This morning all of my comments will be based on our operating basis results as defined in today's press release.

Comparing the third quarter of 2009 with the second quarter, servicing fee revenue increased 5% and management fee revenue was up 13% primarily due to market increases as well as new business wins.

Both items were down compared to the third quarter of 2008 due primarily to market declines.

Clearly revenue from securities finance and trading services was weaker when compared to either the very strong third quarter in 2008 or with the second quarter of 2009.

While foreign exchange revenue declined on both a year-over-year and a sequential quarter basis, brokerage and other revenue, which is reported as part of trading services, was up 11% compared to the third quarter of 2008 due primarily to strength in electronic trading.

We had $396 billion of securities on loan on average in the third quarter of 2009 compared with $617 billion in the third quarter of 2008 and down from $418 billion on average for the second quarter of this year.

With spreads continuing to contract and assuming flat volume, we expect securities finance revenue in the fourth quarter to continue to trend down from this year's third quarter.

Average lendable assets for the third quarter of 2009 were about $2.1 trillion, up 12% from $1.9 trillion in the second quarter of 2009, but down about 23% from $2.7 trillion in the third quarter of 2008, in line with market declines as measured by the S&P 500 or the MSCI EAFE.

The duration of the securities finance book is approximately 29 days.

Compared to the third quarter of 2008 processing and other fee revenue declined 29% due primarily to the effect of the consolidation of the conduits onto the balance sheet.

Net interest revenue on a fully taxable equivalent basis increased about 18% from the third quarter of 2008 due primarily to the impact of the discount accretion.

Net interest revenue on a fully taxable equivalent basis was up 23% from the second quarter of 2009, also due to the impact of discount accretion.

Net interest revenue excluding discount accretion would have declined due to narrower spreads both in the investment portfolio and on customer deposits.

Net interest margin of 247 basis points was up 54 basis points from the second quarter of 2009 on a fully taxable equivalent basis; excluding discount accretion the net interest margin would have been 156 basis points which, based on our fourth-quarter expectation, brings us to the lower end of our prior outlook for the average net interest margin of 170 two 180 basis points for the year.

We recorded $42 million of net securities gains and other than temporary impairment adjustments , about $141 million in gains and about $99 million in OTTI.

The OTTI was primarily due to increases in expected future credit losses in US non-agency mortgage-backed securities.

Regarding operating basis expenses, third-quarter expenses declined 13% compared to the third quarter of 2008 and increased 9% from the second quarter of 2009.

As you may recall, we eliminated performance-based incentive compensation in the first half of 2009 to support our tangible common equity improvement plan.

Note that compared to the second quarter of 2009 salaries and benefits expenses increased 18% primarily due to the $100 million accrual of performance based incentive compensation.

However, all other expense line items remained essentially flat.

Salaries and benefits declined 20% in the third quarter of 2008 due primarily to the effect of our reduction in force which was substantially completed in the first quarter of 2009 as well as a lower level of incentive compensation.

Other expenses declined in the third quarter of 2009, down about 8% from the third quarter of last year and were flat compared with the second quarter of 2009.

We will continue to be vigilant in managing our expenses.

I indicated last quarter that we expect other expenses on an annual basis to be down about 15% from last year.

However, given the slow and fragile economic recovery and a revised revenue outlook for 2009, we continue to remain disciplined regarding any discretionary items and now expect other expenses to be down closer to 25% to 30% compared to other expenses in 2008.

Now let me turn to the investment portfolio.

The average size of the investment portfolio in the third quarter has increased about $13 billion since the third quarter of 2008.

Excluding about $4.5 billion in assets held on deposit as of September 30, 2008 as a result of State Street's role as an intermediary in the Federal Reserve Bank's asset-backed commercial paper money market liquidity facility, the AMLF.

This increase is due primarily to the consolidation of the conduit assets as well as the execution of the investment strategy we announced last quarter, offset partially by maturities in sales from the investment portfolio.

During the third quarter we invested about $14 billion in highly rated securities at an average price of 101.5 and average yield of about 3.33% and a duration of about two and a quarter years.

Those $14 billion are primarily comprised of $11 billion in agency mortgage-backed securities, the vast majority of which are rated AAA, and $2.4 billion in asset-backed securities, the vast majority of which are also rated AAA.

The aggregate unrealized after-tax losses in our available for sale and held to maturity portfolios were $2.98 billion, an improvement of about $1.77 billion from June 30, 2009 and of $3.34 billion or 53% from December 31, 2008.

In our investment portfolio slide presentation we have updated the data through quarter end for you to review.

As of September 30, 2009 our portfolio was 80.4% rated AAA or AA compared with 79.6% as of June 30, 2009.

Our aggregate credit distribution as of September 30, 2009 remains relatively unchanged from June 30, 2009 despite about $8.2 billion in downgrades.

The primary reasons for this are our new purchases which are primarily AAA rated and our conservative reporting of downgrades.

We report our credit distribution based on the lower annuities or SNP.

However, we report all downgrades to you from either agency each quarter even if security was previously downgraded by another agency.

Approximately $3 billion of the $8 billion was previously reported as downgraded.

Plus the new downgrades for the third quarter total about $5 billion.

There was also a positive impact on credit distribution due to our new purchases which are primarily AAA rated and due to the prepayment of securities rated below AAA.

Most of these downgrades occurred in non-agency mortgages and most of these downgrades were due to rising foreclosures due to higher unemployment rates and the end of a moratorium on foreclosures at many banks.

However, we are seeing positive signs of stabilization in the US residential market from the Case Schiller index as well as the index of leading economic indicators.

The former conduit assets now consolidated into the investment portfolio continued to improve in price during the quarter as general capital market conditions improved.

Despite this improvement projected credit fundamentals for certain securities have deteriorated in our view.

Compared to our previous estimate of $600 million we now expect about $850 million or about 14% of the $6.1 billion pretax charge we took in the second quarter upon consolidation of the conduits to not accrete back into net interest revenue over the remaining lives of the conduit assets.

The amount accreted back into net interest revenue in the third quarter was $279 million, making a total of $391 million through September 30, 2009.

We now expect about $600 million of discount accretion in 2009, up from our earlier estimate primarily due to faster prepayments on certain securities.

We still expect about $900 million to accrete back into net interest revenue in 2010, but we are adjusting our outlook for discount accretion in 2011 to about $700 million or $100 million lower than what we estimated at the time of consolidation of the conduits.

We continue to expect about two-thirds of the total discount accretion to occur in the first five years after consolidation.

As you are undoubtedly aware, a great many assumptions go into such a calculation including prepayment fees and credit assumptions across various asset classes.

Let me make a few brief remarks on our outlook for net interest margin for 2009.

First of all, 2008 was, as you know, an anomalous year with unusually strong growth in net interest revenue and atypical net interest margin expansion.

Our assumptions for net interest margin for the rest of 2009 are -- that we continue to execute on our second-half investment plan.

We reinvest fourth-quarter maturing assets of approximately $3 billion in highly rated agency mortgage-backed securities and AAA rated asset-backed securities.

We intend to maintain a duration of the investment portfolio and GAAP on our balance sheet approximately in line with where it is as of September 30, 2009.

At that time the duration stood at 1.07 years and the GAAP on the balance sheet was 0.15 years.

We expect interest earning assets to decrease between 3% and 4% during the fourth quarter of 2009, and this decline is dependent on the continued gradual improvement in the capital markets and our view as to the prudence of carrying lower levels of excess liquidity.

We continue to expect our net interest margin to be between 210 and 220 basis points including discount accretion on average for the year excluding the impact of the AMLF in the first quarter this year.

And from a rate standpoint we expect the Bank of England to remain at 50 basis points for the rest of the year, the ECB to remain at 100 basis points for the rest of the year, and the Fed to keep overnight Fed funds at about 25 basis points.

Lastly, I'll briefly update our capital ratios and the progress against our TCE improvement plan.

In the third quarter our capital ratios continued to improve such that as of September 30, 2009 compared to June 30, 2009 our Tier 1 leverage ratio stood at 8.16%, up from 7.26%; our Tier 1 capital ratio stood at 15.55%, up from 14.53%; and our Tier 1 common ratio stood at 13.58%, up from 12.57%.

In the third quarter we improved our TCE ratio from 4.96% at June 30, 2009 to 5.73% at September 30, 2009, ahead of our original target of 4.29% when we introduced the plan in February.

The majority of this improvement came from price improvement in the investment portfolio and organic capital generation offset partially by a larger balance sheet.

By the end of the year we are targeting our TCE ratio to be about 6.24% with the effects of the fixed-income markets on our investment portfolio and our actual financial results being the primary factors that could influence this result.

The details behind this target displayed on a quarterly basis are listed on slide 15 in the slides detailing the investment portfolio which you can find on our website.

In summary then for the fourth quarter we expect servicing and management fees will continue to modestly improve from third-quarter levels assuming equity and fixed income markets continue to be stable; that participation in our securities finance program will continue to firm up, but the reduced spreads will continue to restrain securities finance revenue.

We expect net interest margin to be near the lower end of the 170 to 180 basis point range in 2009, excluding discount accretion.

And including discount accretion we expect net interest margin to be near the higher end of the 210 to 220 basis point range.

We expect to continue to maintain good expense control remaining committed to achieving positive operating leverage on an annual basis.

And lastly, we will continue to be cautious and grow our capital.

Now I'll turn the call back to

Thank you, Ed.

So while markets are beginning to normalize we're still seeing pockets of uncertainty, especially in the consumer segment in which improvement is dependent on lower unemployment rates.

And as a result we're going to continue to be cautious.

On the plus side our pipeline continues to be strong, although decision-making continues to be slow as our customers are distracted by the many challenges of the unprecedented economic climate.

The sequential quarterly increases we have achieved in servicing and management fee in 2009 are building some momentum but the deep decline in spreads in the securities lending business are restraining growth.

The actions we took earlier this year resulted in our strong capital position and the momentum in our core business plus expense control continue to position us well for a recovery.

Now Ed and I are happy to take your questions.

(Operator Instructions).

Glenn Schorr, UBS.

Thanks.

Just theoretical first.

So we had some acceleration of some of the accretion this quarter on, as you mentioned, some of the prepayments picking up.

So 2009 accelerates, 2010 stays the same, but 2011 moves forward.

How come that's not shared across the years?

I don't know if I'm harping on something irrelevant, but it just seems weird to me that 2010 would stay the same, that some of that wouldn't be pulled forward.

Glenn, it depends on a security specific analysis.

And we go through that for the quarterly determination.

It really depends on what we see security by security for those securities that we are targeting for future discount accretion.

So it's not a linear type of thing at all.

Okay.

So did I -- I don't know if I missed this in the prepared remarks, but what drove the processing fees jump up -- I guess it was 45 from 17 last quarter?

Nothing in particular, just a combination of a lot of relatively immaterial items that resulted in the $28 million sequential quarter gain.

So there's nothing specific to point to there.

Okay.

We're starting to see a bunch of consolidation in asset management land.

You have Ameriprise Columbia, yesterday you had Morgan Stanley Invesco.

Just thoughts on some of the recent transactions on how you're impacted specifically and then just -- maybe just a more general view on consolidation of asset management and how you're impacted.

Hi, Glenn, this is Ron.

I think we're going to continue to see more of that.

If past performance is any indication of future success there I think we will be positively -- it would be positive for us.

And I can cite a number of cases, the most recent one I think last quarter we talked about when Wells and Wachovia merged we were doing the majority of the work for Wachovia, had done none of the -- had done absolutely nothing for Wells Fargo and then won that significant piece of business.

I forget what the assets were; I think they were about $230 billion.

So we were a better major beneficiary there.

So we've got two other situations.

We've got Columbia for whom we do most of the work purchased by Ameriprise for whom we do nothing.

And we have -- let's see, who's the other one.

Well, Van Kampen for whom we do everything which is the deal that was announced I guess late last night.

And Invesco -- in that situation we do do a lot for Invesco as well.

So my sense is that we will be a beneficiary of that kind of consolidation going forward and that trend has been a longtime trend actually going back five, 10 years.

We've seen that in many cases.

And usually we're on one side or the other, lately we haven't been on the buying side.

But because we have been doing so much for the seller, it is just an easier thing for the buyer to do.

And so we've been the beneficiary, I would expect that will continue.

Got you.

And then last one is just a theoretical question back on the securities portfolio.

On the reinvest side, and my thoughts have changed over time after the cycles we've just lived through.

I get that you're buying high-quality and reasonable duration MBS and ABS.

But I guess the question I have is, why after everything we lived through, I know capital ratios are much better, how come go down that path?

In other words, rates could wind up -- they might stay low for a while, but they might rise a lot.

Why take on the duration risk even if you feel good about the credit risk on the reinvest?

Why not stay close to home and just deal with a little bit lower earnings in the near term but have a squeaky clean securities portfolio?

Well, we're trying to strike the right balance there, Glenn, to the question you're asking.

And we're not going down the path that you alluded to in your question about some of the other asset classes that blew out from a spread perspective.

And it's a question of whether or not we want to really stay on the sidelines and give up the current earnings as well as positioning the portfolio for the future.

And we've made the decision that we think the risk/reward there makes sense, recognizing that, yes, rates are probably not going to go down, they're going to go up.

But investing the $14 billion in the asset classes that we did we think makes sense for both the short-term and the longer term.

Okay, guys, I'm good.

Thank you very much.

Howard Chen, Credit Suisse.

Good morning.

My first question for Ed, I think you previously noted that prepayment speeds relating to the conduit would be in the 8% to 12% range.

I was curious what that was during the quarter?

And generally where those are trending right now?

Sorry if I missed this in the prepared remarks.

No, no.

Slightly higher and trending toward slightly higher but not materially so.

Okay.

And then second question.

Ed, in the past you've given some helpful detail on just [Sec] lending spreads.

I know, Ron, you made the comment in the prepared remarks that we saw compression in the spreads there, so I was hoping for a bit more detail.

Okay, I'll take that.

In terms of Q3 versus Q2 if we can use that.

Great.

The volume is down a bit from 417 last quarter to 395 this quarter, so that's down about 5%.

The spread went down from 88 basis points to about 50 basis points.

And virtually all of the revenue variances is due to that change in spread.

I mean just a small percentage is due to the 5% decline in volume.

Okay.

And then I know part of this is a bit of a catch-up with the return of the incentive compensation.

But if I look at some of this quarter's fee revenue trends in particular, foreign exchange, we just touched on Sec lending, some of the servicing fees.

They looked a bit lower when you're catching up with some of the incentive compensation.

So I'm just curious, as we go forward how do we think about the pacing of core revenues with incentive compensation accruals?

Yes, I mean, I think that in a more normalized environment, Howard, I think that the way to look at the pacing of revenues against incentive compensation is based on where we've been historically, which is approximately in the 40% of revenue range and that's a long-term measure, it could be 38%, it could be 41%.

But in the range of 40% of revenues is probably the best way to think about incentive comp over a more normal timeframe.

Okay, thanks.

And then my final one.

Ed, could you just touch on the current positioning of the balance sheet and sensitivity of higher rates?

I know typically your balance sheet is normally liability sensitive, but my sense is that's not the case now.

So what's the current positioning and what are the thresholds between being a little asset sensitive to becoming more normally liability sensitive?

Thanks.

Yes, I mean, we're pretty flat.

The duration gap is the smallest it's, I think, been in a long time, certainly in recent memory at 0.15 years.

So we're pretty flat, we're comfortable with that.

We think that given the investment objectives that we have, as I said, we'll continue to be around that coming into year end both from a GAAP standpoint and from the duration of the portfolio.

But you're right, in a more normal interest rate environment we would normally be in a liability sensitive position and we would expect that to be the case over time once things get back to normal.

Okay and just a clarification on that.

I guess what's normal from an interest rate perspective in your mind?

Hard to say.

I think everybody agrees that where we are right now is not normal, but I don't know, what's a normal Fed funds rate, 3%, 4%?

It's hard to say, but clearly it's not 25 basis points.

Okay, thanks for taking my questions, Ed, Ron.

Mike Mayo, CLSA.

Good morning.

Just to be clear, your guidance for the fourth quarter is what?

Is it what, $1.00 to $1.04, is that correct?

Yes, that's what it would work out to, yes.

Okay.

And FX was down for you guys by a lot and it was at the [Bank in New York].

Is there anything going on there?

No, not that I can tell.

As far as an outlook for that do you expect it to stay down here?

I think we'll see the same level, yes.

I don't think we're going to see necessarily a big jump there.

And just to be clear, you're guiding lower for the fourth quarter or I guess you're guiding down to consensus.

Is that solely due to less than expected securities lending and a lower core margin or is there anything else going on?

No, it's mostly due to securities lending and foreign exchange.

Okay.

And your assets under custody were up 9% yet your custody fees were up 5%.

So why are you cutting margin or what's going on there?

You know, I think we've talked about this in the past, it's just the function of as you're starting to add the assets and as the revenue starts coming in, there's nothing unusual there at all.

So why wouldn't you expect an acceleration then of those fees then?

Well, you may over time; as the assets begin to come on you start seeing that, there's been a delay there, but there's nothing unusual there at all.

And you mentioned several new wins.

Would that all be reflected -- I guess it wouldn't be reflected yet.

But your wins, and I've asked this before, how much in new custody assets do the wins provide as say a percentage of your existing assets under custody, ballpark even?

That's a tough one, small.

I'll get back to you with that, Mike.

Yes.

Okay.

Thank you.

I've got to add them up.

Thanks.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

One clean-up question.

You indicated $600 million for the full year for the accretion for the accretable yield.

And you had $279 million this quarter, so I know that implies $321 million, but I can't recall how much 2Q was.

Q2 was $112 million.

Okay, all right.

So we reported about -- close to $400 million through the end of September, Betsy.

Right, okay.

So a little over $200 million for 4Q.

Right.

And then looking at your capital ratios, with the TCE ratio expected to get to 6.25% and your target really at 5%, I mean how do you think about capital management over the course of the next year?

And what are the trigger points for either a dividend increase or a buyback in the stock?

This is Ron.

I think one of the big trigger points is going to be what the new Fed regulations for capital ratios are going to be.

I think we have to take a look at that first and then make some decisions based on what is there.

But I think that will probably be the first trigger point right there, looking at what the capital ratios are and then making some determination in terms of dividend, and then looking at what kind of opportunities, if there are any out there, in the marketplace to take advantage of.

So it will be somewhat situational, but I think the first big trigger point is going to be what the regulators come out with in terms of new capital ratios.

Are you -- I mean, I would think you are fairly close to the regulators.

So do you have a sense as to where that dialogue is going at this stage?

You know, actually we don't.

We don't know.

But I am assuming this is going to happen sometime soon.

Right, by -- I think (inaudible) was looking for by the end of the year.

I would think so, yes.

So then maybe a little bit of a separate question but related.

Once you feel like you have sufficient capital, how are you thinking about the dividend policy just generally?

Well, all things being equal, obviously we want to get back to the point where we are paying a dividend similar to what we were paying in the past.

But I think we just need to see what the landscape is going to look like.

But generally speaking, we'd want to get back to paying a dividend similar to what we have done in the past.

Which was roughly 20%, 25% range.

Is that fair?

Yes.

All right, thanks.

Marty Mosby, FTN Equity Capital.

Good morning.

I had a question concerning the net interest income.

We are looking at the accretion and we're getting off of the investments that we put on board, which is a positive.

On the flipside we are getting this kind of negative in the sense we are on the lower end.

So we are on one side on the upper end of the range and the other on the lower.

Can we kind of think about how those two things would net out and where we are versus your long-term projections, and where you think the margin would end up?

Well, the reason for one being on the lower end and one being on the upper end is the swing factor of discount accretion.

If you exclude discount accretion from the calculation given the rate environment and given our conservative reinvestments, we're saying that we think we'd be closer to 170 basis points for the margin.

If you include discount accretion, which is performing higher than what we expected when we consolidated the conduits, that's the reason for the other range being at the upper end, 220 basis points being the upper end.

Right.

And all I was trying to get at is if you take the accretion and say, well, really that's not going to be there permanently.

On the flip side, the negative that we're getting from the interest rate environment also isn't going to be there permanently.

So somewhere between 170 and 220 to kind of maybe normalize out over the next couple years because we have enough of the accretion to kind of keep us through as we wait for interest rates to go up.

Once interest rates go up then we get that benefit and that will help offset some of the loss of accretion in the out years.

Exactly right.

Okay.

So I'm just thinking of those two things as you wouldn't go in and just pull out that 50 basis points and say, that's really an abnormal number.

That really is a benefit that we're getting today that's helping us offset and really accelerate our return to what would be a more normal long-term net interest margin once interest rates do go up.

That's correct.

Okay, thanks.

Gerard Cassidy, RBC.

Good morning, Ron.

The question I have, you mentioned the adjusted outlook for the full year of 2009 regarding revenue -- the decline in revenue year over year from '08 and then your expectations on operating EPS numbers.

Can you give us some thoughts on what you're looking at for 2010?

Really can't.

I think it's too early for that right now, Gerard.

Obviously we're working through that now, we'll talk about that early in the year like we normally do.

But it's really too premature to get a sense of that right now.

Okay.

And then the second question was in the securities lending business you indicated in the past that as a result of the disruption in the marketplace some of your customers have pulled out of that business and you've been slowly but surely getting them back.

Can you give us an update on that business, how many customers that were actively involved in the securities lending have come back and what's potentially (multiple speakers)?

Yes, I think we said we've got -- five more came back this time but --.

We had 26 came back.

26 came back, okay.

Five new customers.

What I would say is we're probably even in terms of customers right now, we're down just a little bit.

Ed, would you agree with that?

Yes, close to even.

Close to even in terms of (multiple speakers).

That may be a little bit down.

(multiple speakers) customers back.

Thank you.

Vivek Juneja, JPMorgan.

Hi, a couple of questions, Ron and Ed.

Firstly, the update for other expenses, you talked about it going down 25% to 30% versus full year '08, so obviously that's something that you've increased given that it's running at a lower run rate.

Any color on what other kinds of items and how should we think about what scenario or what drivers would cause that to go back up?

Well, let me start and then let Ed add.

I think one of the things we've tried to do over the years is create as much variable expense as we can.

So to the extent that we can do things with contractors in terms of IT as an example or other type of professional services where we can decrease that rather quickly as opposed to adding staff, I think we've done a good job in doing that.

So we've had more freedom in our ability to do those kinds of things.

And I think you're beginning to see that reflected in the other expenses.

Ed, I don't know if you had (multiple speakers)?

Yes, I mean that's the largest element or the largest lever we have, it's professional services contractors to address certain short-term or very specific technical needs.

But we have other areas of that line which are sales promotion and travel and entertainment and a whole series of miscellaneous items that we can clamp down on.

And frankly we have this year given what we've seen on the top line.

The opposite was true obviously, as Ron alluded to, in prior years where we had the ability to calibrate some of those expenses up and get ahead of some various IT projects, things like that by using contractors and various consultants.

Okay, great, that's helpful.

So that as business comes back that's I guess what would drive expenses (inaudible).

Turning to another one, long-term -- your discount accretion went up for the near term but you've reduced it for '11.

As you think about that how much would -- and it's because of your expectation for prepayment fees going up.

Now how much would long-term rates need to go back up for that to reverse back to where you were three months ago?

Because long-term rates moved but not that much.

So as they move back up another 50 basis points or so would that mean that you go back to where you were in terms of your discount accretion or can you talk to that?

Well, our change in outlook for discount accretion, Vivek, is more actually centered on our assessment of future credit expectations.

It does not have much to do on a go-forward basis with a change in prepayment assumptions.

We're still thinking about the range of eight to 12 on the CPR.

So when we brought it down it's more a question of specific credit analysis on specific securities that caused us to change our view.

That's the opposite of what we've seen so far this year where we've actually generated more discount accretion since the conduit consolidation because of slightly higher prepayment speeds.

Okay, great.

That's very helpful, thanks.

Brian Bedell, ISI Group.

Just a couple housekeeping things first.

Just did you say you expect about $850 million of the $6.1 billion charge to not accrete ultimately?

Did I get that right?

Yes.

Okay.

And is the decline in the $800 million to $700 million of discount accretion in 2011, is that due more to you're modeling higher default rates or is it more due to the advancement of some of the prepayment speeds -- the advancement that you're seeing in the current periods here?

It's the former.

It's based on our change of that view on certain securities from a credit perspective, Brian.

Right, okay.

Got it.

And just one other housekeeping.

On the tax rate outlook, what's your outlook for the fourth quarter?

Well, we said that we thought we'd be for the full year between 29% and 30%.

I think that's the number in the press release.

Okay, that's good.

Okay, and then just I guess a little more big picture.

I guess first on the asset servicing side, it looks like you've won so far, just in keeping track of this, year to date about $620 billion of new business.

And coming into this year I think you said you had $317 billion that was yet to be installed.

Just kind of a question, how much you've installed in the third quarter and then what you might be installing in the fourth quarter -- just to get the trajection of new business into the revenue stream?

I can't give you an exact figure, but I would say a good portion of what we talked about last time has or continues to be installed between now and year end.

And I would assume what we're announcing today will -- some of it will begin to be installed in the fourth quarter, but normally it would flow over into the first and second quarters of next year.

Okay, so some of the wins that you had in the first half were still being installed in the third quarter during (multiple speakers)?

Yes, because they're longer.

Wells is a good example, that's going to take some time, that's a big chunk.

Okay.

Has Wells been installed yet?

No, it's in the process.

Okay, still in the process, okay.

So that's not really in the revenue run at this stage?

No.

Okay.

And then just a couple other ones like brokerage fees, was that helped by more transition management revenue this quarter?

It was helped by the electronic trading platform we have, specifically the Currenex.

Currenex, okay, so that was doing well, okay.

I guess because retail FX trading is hot right now.

Then securities lending, spreads down 50 bps.

You expect further spread compression in the fourth quarter on that book?

No, I think about the same, maybe a little.

About the same, okay.

And then just looking out I guess longer term, I know you're going to update your guidance at your February meeting.

But should we still think of the Company as a basic 10% to 15% EPS grower?

I know that's been your long-term target for a while -- from the reduced guidance base that we have this year.

If we go into 2010 and revenues are still sluggish from a weak macro backdrop, do you have enough expense flexibility to at least hit the 10% type of EPS near the bottom of your long-term range?

Well, first of all we're not going to retreat from our long-term goals.

Those are going to continue to be goals for us going forward.

I can't tell you what's going to happen next year.

Do we have some flexibility on the expense side?

Yes, I think we have some flexibility.

But what I feel good about is that the basic core fundamental revenue streams that attract customers, service fee revenue, management fee revenue, continues to grow sequentially quarter.

And from that as markets change will come the other revenue from those new customers.

So what I'm focusing on right now is those acquisitions of new customers and the fundamental core business represented by servicing fee revenue and management fee revenue.

Because history has shown that once you have that core revenue the rest of that, whatever you want to call it -- market-driven revenue, securities lending, foreign exchange, transition management, other -- follows pretty closely.

Right.

So what's happening right now is we're I think successfully building that core revenue from which the additional revenues -- including NIR, by the way, which creates that, the basic inventory for NIR comes along.

So that's what has been going on in 2009 which I think -- and will continue in 2010.

And so I would hope as market normalize you'll begin to see those other revenue streams growing on the backs of these new wins.

Right.

And you'll be able to lag your deposit pricing I would assume when the Fed raises rates or if there's a global coordination of (multiple speakers)?

We've done that in the past, lagging rates on the liability side, yes.

Right, right.

And then just lastly on expenses, any major investment projects?

I know last year you did some international stuff with Canary Wharf and the Poland (multiple speakers).

Yes.

No, we've got a lot of that behind us.

One of the decisions we made in the higher revenue growth period is we made a lot of investments.

The outsourcing business, the middle office outsourcing is a good example of that done, moving into Canary Wharf, taking care of new building in [Ireland].

A lot of that stuff passed us.

So I feel pretty good about that.

Right, great.

Thank you very much.

John Stillmar, SunTrust.

Good morning and thank you for taking my question.

Really quickly, can you help differentiate for me, specifically going back to Sec lending, with the drop it seems like most of it is basis point related, not necessarily absolute balance outstanding.

Right.

Typically we see in the third quarter that there is some seasonal decline in demand for securities lending.

Right.

And we see that demand pick up in the fourth quarter.

But if we just look at the balances themselves, they didn't exhibit some of that traditional seasonal decline whereas it was more of a pricing decline.

So can you help characterize my expectation for the fourth quarter vis-a-vis what is traditionally seasonal versus what you might -- the margin guidance that you're -- the margins you've set for this business which might be a little bit more cyclical?

No, the typical cycle has been high second quarter, lower third quarter and about the same I'd say in the fourth quarter.

So maybe a little uptick, but traditionally that's what the cycle has been.

I don't anticipate anything different this year.

Right, our guidance for the remainder of the year assumes a flat level of securities on loan.

We think that's a prudent thing to do given what we're seeing in the securities lending business right now.

Okay.

And then can you talk about, just given the lower margins in securities lending and the fact that it's an integrated product a lot of times with custodial and other types of services that you provide especially as you're expanding into hedge funds.

Can you talk about the pricing of some of your custodial businesses?

And should we be expecting -- back to Mike's question earlier about the revenue in basis points per assets under custody -- can you help me think about what the trajectory might be of that growing in the future to the extent that Sec lending isn't as profitable maybe on a go-forward bases as we reset to new valuation paradigms?

I think the first thing I have to do is repeat what we've said a number of times and that is the discipline that we apply here in terms of not subsidizing the core businesses based on the anticipation of gaining either securities lending or foreign exchange is something that we've had a very strong discipline about.

So that if things like this happen the core revenue streams are not dramatically affected.

So we've been pretty good about that for years and continue to be.

And I think that will play well for us going forward.

Great.

Thank you so much for my question.

Okay.

At this time I would like to turn the call back over to Ron Logue for closing remarks.

Thank you.

I don't have any other closing remarks.

And we look forward to seeing you again sometime soon.

Thank you.

This concludes today's State Street Corporation third-quarter call and webcast.

You may now disconnect.